Exercise 8-12: During 2016, Mercator Company borrowed $80,000 from a local bank. In addition, Mercator used $120,000 of cash to construct a new corporate office building. Based on average accumulated expenditures, the amount of interest capitalized during 2016 was $8,000. Construction was completed, and the building was occupied on January 1, 2017. Determine the acquisition cost of the new building. The building has an estimated useful life of 20 years and a $5,000 salvage value. Assuming that Mercator uses the straight-line basis to depreciate its operating assets, determine the amount of depreciation expense 2016 and 2017.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Exercise 8-12: During 2016, Mercator Company borrowed $80,000 from a local bank. In addition, Mercator used $120,000 of cash to construct a new corporate office building. Based on average accumulated expenditures, the amount of interest capitalized during 2016 was $8,000. Construction was completed, and the building was occupied on January 1, 2017.
- Determine the acquisition cost of the new building.
- The building has an estimated useful life of 20 years and a $5,000 salvage value. Assuming that Mercator uses the straight-line basis to
depreciate its operating assets, determine the amount of depreciation expense 2016 and 2017.
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